2022 (9) TMI 827 - AT - Income Tax

Estimation of income - bogus purchases - addition of commission on the bogus purchases - HELD THAT - Recently in Deputy Commissioner of Income-tax v DBM Geotechnics and Construction (P.) Ltd. 2022 (3) TMI 1405 - ITAT MUMBAI has upheld the income embedded at the rate of 12.5% in such purchases as income of the purchaser. As profit should be imputed to bogus purchases transactions, we deem it fit and proper that profit is required to be estimated only on the amount of bogus purchases. The quantum of the profit as generally estimated in the cases of bogus purchases should be at the rate of 12% of such purchases as held by the Honourable Jurisdictional High Court and we have not been guided by both the party as to why and how the said view of the Honourable Jurisdictional High Court is not acceptable in the present case. Accordingly, we reverse the order of the learned CIT A and direct the learned assessing officer to compute the unaccounted profit earned by the assessee at the rate of 12% on bogus purchases. As we have followed the jurisdictional high court decision where in the court has not guided as to make separate addition on the commission on the bogus purchases and therefore, respectfully following that judgement we do not find any merits in the appeal of the revenue to confirm the addition of commission and thus this ground of the revenue is dismissed and that of the assessee is allowed.

Issues Involved:
1. Application of Gross Profit (GP) rate on total turnover versus disallowance of 25% of bogus purchases.
2. Charging commission on restricted addition versus on bogus purchases disallowed.
3. Genuineness of alleged purchases and burden of proof.
4. Consideration of investigation findings proving bogus purchases.
5. Reopening of assessment based on received information and proper inquiries.

Issue-wise Detailed Analysis:

1. Application of GP Rate on Total Turnover versus Disallowance of 25% of Bogus Purchases:
The Revenue contended that the CIT(A) erred in directing the AO to apply a GP rate of 6% on total turnover instead of disallowing 25% of bogus purchases. The AO had initially disallowed 25% of the alleged bogus purchases amounting to Rs. 21,05,94,215/-. The CIT(A) observed that the assessee had declared varying GP rates in different financial years and directed the AO to apply a GP rate of 6% on the total turnover to cover any possible leakage of revenue. This resulted in an addition of Rs. 1,14,76,726/- instead of the AO's addition. The Tribunal upheld the CIT(A)'s decision, noting that the GP rate method was appropriate given the circumstances.

2. Charging Commission on Restricted Addition versus on Bogus Purchases Disallowed:
The Revenue argued that the CIT(A) was wrong in directing the AO to charge commission at 6% on the restricted addition rather than on the total bogus purchases disallowed. The AO had added Rs. 31,58,913/- as commission on the total alleged bogus purchases. The CIT(A) reduced this to Rs. 6,88,603/-, applying the 6% commission rate only on the sustained addition of Rs. 1,14,76,726/-. The Tribunal found no merit in the Revenue's appeal on this point and upheld the CIT(A)'s decision.

3. Genuineness of Alleged Purchases and Burden of Proof:
The AO found that the assessee had indulged in bogus purchases from M/s. Unnati Alloys Private Limited, amounting to Rs. 21,05,94,215/-. The assessee argued that the purchases were genuine, providing various documents such as purchase bills, ledger accounts, and confirmations. However, the AO noted discrepancies and lack of satisfactory replies from the alleged suppliers. The Tribunal noted that the assessee failed to substantiate the genuineness of the purchases and upheld the CIT(A)'s decision to estimate income based on the GP rate.

4. Consideration of Investigation Findings Proving Bogus Purchases:
The AO relied on findings from the investigation wing, which indicated that the assessee was involved in bogus purchases. The investigation revealed that entities like M/s. Unnati Alloys were involved in giving non-genuine accommodation entries. The Tribunal found that the assessee did not effectively counter the findings of the investigation, and thus, the CIT(A)'s approach to apply a GP rate was justified.

5. Reopening of Assessment Based on Received Information and Proper Inquiries:
The assessee challenged the reopening of the assessment, arguing that it was based on wrong facts and without proper inquiries. The AO had reopened the assessment based on information from the investigation wing. The Tribunal found that the reopening was justified as the AO had obtained necessary approvals and recorded reasons for satisfaction before issuing the notice under section 148.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to apply a GP rate of 6% on the total turnover and to charge commission on the restricted addition. The Tribunal dismissed the Revenue's appeal to disallow 25% of bogus purchases and to charge commission on the total bogus purchases. The Tribunal also dismissed the assessee's appeal against the sustained addition and commission, finding that the purchases were not substantiated as genuine. The Tribunal concluded that the reopening of the assessment was valid. Both appeals were partly allowed.

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